(Releads, adds trader quote, background, updates prices) By Joe Silha NEW YORK, July 27 (Reuters) - Front-month U.S. natural gasfutures, pressured by some long liquidation or profit takingahead of expiration, traded lower on Friday, but supportiveinventory data and warm weather forecasts for the next two weekshelped limit the downside. Widespread heat this month has stirred up demand and slowedstorage builds to below average for 13 straight weeks. That haspulled a record inventory surplus to year-ago down nearly 45percent from late-March highs. With more heat in the forecast for the next two weeks,particularly for the Midwest, traders expect weekly storagebuilds to remain below average and further whittle down thestill-huge surplus to year-ago and the five-year average. "I think longs are just taking some profits ahead ofexpiration, but I don't see prices falling off much withforecasters still looking for hot weather through the middle ofAugust," a Pennsylvania-based trader said. At 12:50 a.m. EDT (1650 GMT), front-month August gas futures on the New York Mercantile Exchange, which expire latertoday, were down 6.6 cents, or 2 percent, at $3.039 per millionBritish thermal units after trading between $3.032 and $3.11. The front contract had gained 11 percent in six of sevenprevious sessions, prompting technical traders to note that themarket was overbought and due for a profit taking pullback. Early this year, decade-low prices below $2 helped tightenthe supply/demand balance for gas by prompting many utilities toswitch from coal to cheaper gas to generate power. Record heat this summer, particularly in the Midwest butalso at times in the Northeast, lifted demand further and helpeddrive gas prices up nearly 65 percent from spring lows, hittinga seven-month high near $3.20 early this week. But many traders see only limited upside from here with peaksummer heat likely to fade in the next few weeks and storage andproduction still at or near record highs. Private forecaster MDA EarthSat still expects heat tocontinue, particularly for the Midwest, for the next two weeks. Some traders also caution that as gas prices push above the$3 mark, many utilities that switched this year from coal tocheaper gas to generate power could move back to coal.

PRODUCTION, STILL NEAR RECORD HIGHS Traders were waiting for the next Baker Hughes drilling rigreport on Friday after last week's data showed the gas-directedrig count fell for the seventh time in eight weeks, hitting itslowest level in 13 years. (Rig graphic: http://r.reuters.com/dyb62s ) Dry gas drilling has become largely uneconomical at currentprices, but drillers have been moving rigs to more profitableshale oil and shale gas liquid plays that still produce plentyof associated gas that ends up in the market after processing. Baker Hughes data last week showed that horizontal rigs, thetype used to extract oil or gas from shale, fell for a secondstraight week. But the horizontal count at 1,164 is still notfar below the all-time high of 1,193 hit nine weeks ago. The shift to more horizontal drilling has slowed the overalldrop in dry gas output.

ANOTHER LIGHT WEEKLY BUILD Data from the U.S. Energy Information Administration onThursday showed total domestic gas inventories rose last week by26 billion cubic feet to 3.189 trillion cubic feet. While the build matched the Reuters poll estimate and wasviewed as neutral by some, others saw it as supportive, notingit fell well short of last year's gain of 48 bcf and thefive-year average increase for that week of 61 bcf. The weekly gain trimmed the surplus to last year by 22 bcfto 487 bcf, or 18 percent above the same week in 2011. It alsosliced 35 bcf from the excess versus the five-year average,reducing that surplus to 435 bcf, or 16 percent.

(Storage graphic: http://link.reuters.com/mup44s) But total storage stands at about 80 percent full, a levelnot normally reached until mid-September. Producing-regionstocks are at 84 percent of estimated capacity. Concerns remain that the storage overhang could still driveprices to new lows later this summer as storage caverns fill. The storage surplus to last year must be cut by at leastanother 240 bcf to avoid breaching the government's 4.1-tcfestimate of total capacity. Stocks peaked last year in Novemberat a record 3.852 tcf. EIA estimates that gas storage will climbto 4.002 tcf by the end of October. Early injection estimates for next week's EIA report rangefrom 18 bcf to 33 bcf versus last year's build of 43 bcf and thefive-year average increase for the week of 56 bcf.